It ends three straight months of declines.
Mirroring the increase in the in May, Personal Consumption Expenditures (PCE) inflation rose last month, according to the U.S. Bureau of Economic Analysis.
The PCE, which is the Federal Reserve’s preferred gauge of inflation, jumped to 2.3% in May, up from 2.1% in April. The 2.3% inflation rate was in line with economists’ estimates. For the month, the PCE rose 0.1%, also in line with estimates.
It ended three straight months of the 12-month inflation rate dropping. The increase in the PCE coincides with rising tariffs, as May as the first full month that the new tariffs went into effect.
, which excludes food and energy costs, jumped to 2.7% in May, up from 2.5% in April. This was higher than economists expected, as the consensus target was 2.6% for core PCE. For the month, core PCE climbed 0.2%, which was also higher than the 0.1% projections.
Consumer Spending Also Falls
The PCE gauge also showed that consumers curtailed their spending in May. The PCE found that consumer spending declined $29.3 billion, or 0.1% in May, which was below the 0.2% increase in April. It also fell short of estimates, as economists were expecting spending to increase 0.1% in May.
There was a drop of $49.2 billion in spending on goods, led by motor vehicles and parts, which dropped $49.3 billion. Gasoline spending fell $19.8 billion. On the plus side, nondurable goods spending rose by $8.6 billion, and clothing and footwear increased by $5.3 billion.
The overall drop in goods spending was offset somewhat by a $19.9 billion increase in services spending. Food services and accommodations saw a $10.6 billion drop in spending last month while financial services spending decreased by $5.7 billion. However, housing and utilities spending rose by $13.7 billion while healthcare spending increased by $11.3 billion.
Personal Income Drops
In addition, fell well short of expectations, decreasing by $109.6 billion, or 0.4%. Economists had anticipated a 0.3% gain in personal income in May. Disposable personal income, which is personal income less personal current taxes, dropped by $125.0 billion, or 0.6%.
“The Fed’s preferred measure is projected to average 3.1% in 2025, significantly above its 2% target,” said John Murillo, chief dealing officer of B2BROKER, a global fintech solutions provider for financial institutions. “Consumer pessimism, driven by the tariff war’s inflationary impact, is already hurting spending and investment. In fact, retail sales dropped by 0.9% in May — worse than expected — as consumers cut back on big-ticket items like cars and other luxuries. Stagflation risk is akin to the economic monster under the bed — slow growth, high inflation, and rising unemployment all co-occurring.”
Markets took the news mostly in stride, as the indexes were trending higher, with the Dow Jones rising some 275 points in early trading, the up about 30 points, and the Nasdaq gaining 75 points.
It did shift some thinking on the cutting rates in July, however, as the CME FedWatch poll showed 81% of interest rate traders expect the Fed to keep rates where they are in July, up from 79% yesterday.
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